401 to Qualified Opportunity Zone?

Question

Looking into multifamily in a newly identified Opportunity Zone and was wondering if I could transfer money from my old employer's 401k plan into a Qualified Opportunity Fund. The goal being to defer the tax and early withdrawal penalty from the 401k. Thanks for the help team!

Brian Eastman · Answer

@Daniel Gibbons

There is not a pathway that aligns with your thinking.

If you were to distribute your 401(k) to yourself, that would be a taxable event.  You could then invest the remaining balance of your plan into an opportunity fund and shelter the income that investment creates via the opportunity zone tax breaks, but it is not going to offset the distribution from the 401(k) to begin with.

Alternately, you could transfer the old 401k to a self-directed IRA or Solo 401(k).  There would be no taxes or penalties.  While an IRA can certainly invest in an opportunity fund if it is a good investment, there is no great benefit in doing so. The plan is not taxed on the income in the first place, so the opportunity zone tax breaks would not apply.

Dan M. · Answer

@Brian Eastman Account Closed Thank you for the clarification it is still pertinent even a year later!

Brian Eastman · Answer

@Angel Garibay

A friend could invest in your deal.  Some family could, but not lineal family like parents, grandparents, children, etc, as they are disqualified parties to the IRA.

A 401(k) has its own tax benefits, but would not benefit from the special tax benefits applied to opportunity zone investments.  When you are not paying taxes, you cannot write off deductions against those non-existent taxes.

Kevin Gray · Answer

Keep in mind withdrawals from a retirement account (401k, IRA, 403B, SEP IRA, etc..) are taxed at your ordinary income rate (unless your account has a Roth option)...NOT A CAPITAL GAIN!  Also, depending on your age you could be exposed to a penalty as well.  Consult a CFP/CPA/EA before transferring retirement funds and make sure transaction is allowed and set up properly to eliminate any unnecessary taxes, fees and penalties.

Angel Garibay · Answer

@Brian Eastman

Would a close friend or family member be able to invest in an opportunity zone plan that I have using money from their current 401k and be able to benefit from the tax structure?

Bill B. · Answer

Don’t forget. For a multifamily deal to qualify for an opportunity zone investment you need to spend more on improvements than the purchase price. This is why 99% of ozone investments will be in funds.

Robert O'Keefe · Answer

So anything coming out of retirement is taxable?

You cannot avoid the penalty by rolling that into an Op-Zone Property?

Brian Eastman · Answer

@Matthew White

A retirement plan can invest in an opportunity zone, but will not benefit from the tax structure the opportunity zone produces.

Say you purchase with a 401k - opportunity zone or not.  When you sell, there is no taxable gain.

When you distribute cash from the plan to yourself, that is when you will pay taxes.  The taxes you pay at that time are based on your marginal rate regardless of how the income was produced within the retirement plan over the years.  There is no mechanism to carry over a deferral of the gains internally within the plan to your act of taking a distribution.  Whether the plan grew over the years investing in stocks or real estate does not matter when you take a distribution.

Matthew White · Answer

I'm trying to figure out why this wouldn't be possible based on IRS rules and guidelines. If you buy real estate within a Solo 401k or Self-Directed IRA, then obviously you're purchasing the asset with pre-tax dollars. Let's assume you've followed the rules, reinvested the income produced by those properties over the years, and you have substantial equity in several real estate holdings within your Solo 401k. All of these gains would grow tax-deferred over the years. As you approach retirement, why could you not sell these properties within the Solo 401k, invest the proceeds in a Qualified Opportunity Zone investment, hold for ten years, and receive the step-up in basis benefit based on the fair market value on the day it is sold or exchanged? In theory, you would receive the benefit of pre-tax contributions to the Solo 401k, tax-deferral of gains, and the possibility of a tax-free cash out if held for the ten year period. In reading the rules, I don't see anything that says the step-up in basis after 10 years is not given in the event you purchase a Qualified Opportunity Zone property within a 401k. Since a distribution is never occurring, you aren't violating early distribution rules. This would just involve moving out of one property and into another.

Brian Eastman · Answer

@Daniel Gibbons

Yes, if you happen to qualify for the Solo 401(k) by being self-employed with no full time employees, it does have some advantages over the IRA.  IRA is a great diversification tool as well.

Keep in mind, the plan would need to fund the deal, not assist you in funding a deal.

401 to Qualified Opportunity Zone?

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